Reviewing Our Four Biggest Winners of 2020

We’ve had a good year in our equity portfolio. Times like these let us pause and review why the names we researched and bought have outperformed. Remember, stock price appreciation isn’t our definition of “getting it right.” Getting it right is buying a company for specific business reasons and seeing the company hit those metrics.

This week’s Portfolio Round-Up features four case studies on companies we’ve either invested in or researched and alerted to our Macro Ops Collective members:

    • At-Home, Inc. (HOME)
    • Enlabs, Inc. (NLAB)
    • Cardlytics, Inc. (CDLX)
    • LiveChat (LVC)

We’ll wrap this all up with a teaser on our most exciting idea in our portfolio. A micro-cap company growing revenues 300%+ per-year with a differentiated product portfolio trading at 2x sales. Oh, and we should mention… it just turned profitable.

We’re going to cover three main avenues in the following case studies:

    1. Original Bull Thesis / Why We Liked The Idea
    2. How Each Idea Fit In With Our Thematic Investing Strategy
    3. The Macro Ops Edge: Applying Technicals To Fundamentals

Let’s get after it!

Case Study 1: At-Home, Inc. (HOME)

At-Home (HOME) offers home furnishings, including accent furniture, furniture, mirrors, patio cushions, rugs, and wall art; and accent décor, such as artificial flowers and trees, bath, bedding, candles, garden and outdoor decor, holiday accessories, home organization, pillows, pottery, vases, and window treatments.

HOME was a bet on our Homebuilding Thematic we developed earlier in the year. We alerted Collective members to the budding opportunities in residential homebuilding in mid-July.

Our bull thesis was simple (emphasis mine): “Short-term slowdowns in same-store sales and margins have given us an opportunity to purchase a fast-growing, competitively advantaged speciality retailer insulated from online and big box competitors. On a normalized basis, HOME is a growing, 10% EBIT margin company with a store model no retailer can match.”

There were three key advantages that attracted us to HOME:

    1. Costco-like store model
    2. Benefit from non-”internetable” sales items
    3. Attractive per-store (unit) economics

Cliff Sosin of CAS Investment Partners outlined these advantages in his Q1 2020 investor letter. Let’s start with the first advantage.

Costco-like Store Model: Each store has ~3-5 employees operate over 100K sqft of warehouse space in a bare-bones self-service atmosphere. Given their space, HOME can fill their store with 50K+ items. This allows the company to negotiate lower purchasing prices. And as the company expands stores, their purchasing power only increases. Like Costco, all cost savings flow through to the customer in the form of lower prices

This is important when it comes to competing with companies like Wayfair who offer similar products 100% online. Since HOME can leverage its inventory space for lower costs, customers actually save ~20% shopping at HOME versus Wayfair.

The 20% savings adds up when you consider the second key advantage in HOME’s business model.

Non-Internetable Sales Items: Since HOME sells decor, furniture and fixtures, consumers opt for an in-person touch and feel experience before purchasing. Additionally, it costs a lot to ship HOME’s product, making in-person pick-up an economically positive option. And even against companies that specifically cater to delivering furniture (Wayfair), HOME wins on cost ($70/order compared to Wayfair’s $200-$300).

These advantages lead to attractive per-store (unit economic) metrics.

Attractive Unit Economics: Based on 2019 figures, the company generates roughly $6.5M in sales/store and $1.1M in EBITDA/store. They currently have 219 stores growing roughly 20%/year. These stores have an average payback period of ~2 years, with 2nd-generation real estate EBITDA margins close to 30%. Though growing 20%/year, HOME’s only penetrated 37% of their total potential. That means in a perfect world HOME operates 590 stores throughout the US with 30% incremental store EBITDA margins.

Finally, we thought HOME could eventually open between 365 and 442 stores for an estimated $365M – $486M in annual EBITDA. In other words, the current price reflected between an 11% and 14% yield. There was room to run.

The Macro Ops Trifecta: Applying Technicals To Fundamentals

This is where Macro Ops differentiates itself from any investing/trading research service out there. We apply basic technical analysis to our underlying fundamental beliefs about a business to determine the most attractive Risk/Reward entry point.

At the time we wrote our report, HOME just completed a bullish head and shoulders reversal pattern (see below):

Now we have everything in place for a great investment or trade:

    1. Company that fits one of our long tailwind thematics
    2. Strong underlying fundamentals
    3. Bullish technicals confirming price inflection

The result? HOME ran from $8.88 to nearly $24 (174% return) in six weeks! That’s an annual IRR of 1,450%.

These are the kind of results that can happen when thematics meet fundamentals which meet an explosive entry point set-up.

Case Study 2: Enlabs, Inc. (NLAB)

Enlabs (NLAB)  offers entertainment through various products, including casino, live casino, betting, poker, and bingo under various brands. The company is also involved in delivering sports results and technical solutions in the online gaming industry.

The stock checked all our fundamental boxes and fit perfectly with our Digital Transformation thematic. We found NLAB through a simple stock screener while looking through Sweden. Here were the parameters of the screen:

    • Market Cap > $300M
    • Pre-tax Margins > 10%
    • Gross Margins > 0%
    • ROIC > 6%

NLAB was one of the best businesses in the entire screen. The company had 80% Gross Margins and 30% EBITDA margins. Check out our original thesis below (emphasis mine):

“NLAB is the Baltics market leader in the highly regulated, high barrier to entry and fast-growing online sports betting/gambling industry. The company commands 25% market share in the Baltic region and has its sights set on global expansion. NLAB’s growing earnings & revenues 30%+/annum while sporting 30% EBITDA margins. You can buy this business for 15x normalized earnings, well below industry/market averages. Management owns a decent chunk of stock and has zero debt.

It’s rare to find a monopoly-like business trading for 15x earnings while growing revenues / earnings 30% per year. NLAB was a high-conviction bet.

NLAB In Digital Transformation Thematic

NLAB fits in perfectly our Digital Transformation thematic. The business made it easy for people to engage in online gambling / sports betting. Here were our thoughts on NLAB’s core business back in May (emphasis mine):

“NLAB’s core business is Optibet, it’s online gambling/sports betting platform. It’s a capital-light, 80% gross margin business. The company invested a ton of money to create a new, proprietary platform that can seamlessly integrate into new countries and regulation standards. Think of it like plug-and-play for online sports betting. The core business should continue its 30% growth as the Baltic sports the fastest internet and highest mobile data usage per capita in Europe.”

How We Thought About NLAB’s Valuation (Adjusted For USD)

Our initial write-up had three potential “alternate realities” for NLAB’s 2024 valuation: Bull case, bear case and neutral.

The bull case showed NLAB continuing its 30% per-year growth in top-line revenue and bottom-line earnings for the next five years. This got us $118M in revenues, $29M in pre-tax profits and $24M in FCF. That gave us an estimated shareholder value of $5.58/share (196% upside at time of writing).

Our bear case estimated that NLAB would lose ~13% in revenue per year for the next five years while maintaining margins. This gave us $21M in revenues, $5.21M in pre-tax profits and $4M in FCF. Or $1.48/share in shareholder value (21% downside).

Finally, our neutral valuation case assumed the company would grow revenues 30% in 2020, but fail to grow at all over the next four years while maintaining margins. This resulted in $56M in revenues, $14M in pre-tax profits and ~$14M in FCF. That gave us ~$3.05/share in shareholder value (62% upside).

In other words, even if the company failed to grow revenues over the next five years we’d still have a decent bargain. That meant we got all growth on top of the current year for free.

Let’s head over to the tape for the final step in our Macro Ops Equity Framework.

The Macro Ops Trifecta: Technicals To Fundamentals

NLAB broke out of a two-month cup and handle pattern a few days before we released our report. The breakout took place on above-average volume and the stock failed to break below its new-found support level. All good signs (see below).

Since our report the stock has risen 110% in six months. That’s a 220% 12M IRR. The growth came from two engines:

    • Multiple expansion
    • Business performance

The company continues to grow revenues 30%+ while cranking out 80%+ Gross Margins. They’ve expanded into other territories and bought complimentary companies to further enhance their economic moat. It also helps when you have a couple multiples expand. This means investors are willing to pay more for the same company. NLAB’s grown EV/Sales from <2.5x to >3x and EV/EBITDA from 11x to 13.25x.

Here’s the crazy part — we still think it’s crazy cheap. Better yet, the long-term technicals point to even higher prices (see below)!

Case Study 3: Cardlytics, Inc. (CDLX)

Cardlytics (CDLX) is a native bank advertising channel that enables marketers to reach consumers through their trusted and frequently visited online and mobile banking channels. It also provides solutions that enable marketers and marketing service providers to leverage the power of purchase intelligence outside the banking channel.

CDLX fits our Digital Transformation Thematic by leveraging AI to provide marketers extremely targeted customers based on what they’ve actually bought with their credit cards. The company offers a win-win-win for marketers, banks and customers.

We published our research report on 08/04. Here was our bull thesis (emphasis mine):

“CDLX can continue to grow revenues at above-average market rates for the next five years. In doing so, they’ll leverage their initial investments in their Cardlytics Direct platform and go from loss-making to net income positive. CDLX is founder-led, sports zero debt and $20M net cash and grows at 40%+ per year. Mr. Market’s selling the company for 4x EV/Sales. This is much too cheap. A mere 6x multiple on conservative estimates of 2024 sales gets us $2.6B market cap (or $100/share). That would represent a 24% annualized return over the next five years.

Like we mentioned, CDLX creates a win-win-win for marketers, banks, and bank customers. CDLX does this by solving crucial problems for marketers and banks:

    • The problem for marketers: Marketers increasingly have access to data on the purchase behavior of their customers in their own stores and websites. However, they lack insight into their customers’ purchase behavior outside of their stores and websites, as well as the purchase behavior of individuals who are not yet customers
    • The problem for Financial Institutions (FIs): Leveraging our powerful predictive analytics, we are able to create compelling cash back offers that have the potential to drive deeper and sustained use of the FI channels, which we believe reduces customer attrition and increases use of the FIs’ credit and debit cards

The banking customers win by default as they’re shown discounts on products/services they already purchase. This encourages them to increase their credit card/banking app usage, which creates more user engagement.

CDLX also benefits from two major competitive advantages:

1. High Embedded Switching Costs

From our write-up (emphasis mine): The digital infrastructure CDLX sets up with its banking partners is hard to rip out. It’s like when Pat Dorsey talks about companies ripping out Oracle databases. It doesn’t happen.CDLX can leverage these switching costs for future price increases or to simply stave off competition. Much like Oracle, it doesn’t matter if a competitor has a cheaper, faster product. If the switching costs to rip out CDLX and replace it with a new, shiny product aren’t high enough to justify the switch — the bank won’t do it.

2. Network Effects

CDLX also benefits from network effects. The flywheel is simple:

    • New marketers create new incentives for banking customers
    • This increases engagement with digital banking channels
    • Which then attracts more banks to the platform, increasing the value for marketers and customers

On achieving such scale and network effects, CEO Scott Grimes believes the company will analyze 50% of every transaction made by US consumers. That’s nuts..

How We Thought About Valuation

CDLX generated operating losses at the time we released our report. In turn, we chose to value the company on an EV/Sales basis. EV/Sales is a great valuation metric for companies not yet profitable on the bottom-line, but show promises of positive unit economics and potential operating profits.

Here’s how we thought about CDLX’s valuation in early August (emphasis mine):

“Suppose CDLX grows revenue 15%-per-year for the next five years. I know, this is a conservative estimate of future revenue growth. In this scenario, we end 2024 with $423M in revenue. Applying a 9x multiple on those sales gets us $3.8B in EV (versus $1B today). Even if we apply a 6x sales multiple we get $2.54B in EV. That’s considerably higher than Mr. Market’s price. A 6x sales multiple doesn’t feel farfetched. The company has zero debt, $20M in net cash, growing 40%+ with a sticky, high switching cost business.

Where We Sit Today: Another Big Winner

The stock traded ~$72/share when we published our report to Collective members. For the next three months the stock was range-bound between $86 and $64. Then in early November the Technicals confirmed the bullish thesis.

Collective members were ready to capture this move. They understand the power of applying a technical overlay to a strong underlying fundamental analysis.

The Macro Ops Trifecta: Technicals Confirming Fundamentals

CDLX broke out of its six-month long rectangle consolidation on November 2 and never looked back (see below):

The stock is up 67% since we sent our report to Collective members in August. A 200% annual IRR. not bad!

We’ve got one more big winner to review: LiveChat, Inc. (LVC).

Case Study 4: LiveChat, Inc. (LVC)

LiveChat, Inc (LVC/LCHTF) is a small-cap Polish software business. The company offers premium chat-based customer service software from start-ups to Fortune 500 companies.

We sent this research report to Collective members in October of 2019. I know what you’re thinking. “Isn’t this supposed to be the biggest winners of 2020??” Patience, young grasshopper.

Here was our bull thesis at the time published (emphasis mine):

“The bull case is simple. LVC hits nearly every single one of our benchmarks for investment. The company is founder-led with management owning over 40% of shares. They sport high EBITDA and FCF margins with a SaaS business model. The company’s balance sheet is strong with loads of cash to cover all liabilities 9x over. Finally, once implemented, LVC’s software incurs high switching costs for customers. LiveChat isn’t “basement” level cheap. But we think paying 15x this years earnings for a growing, high margin, no debt software business is usually a good idea.

LVC is another member of the Digital Transformation Thematic as they provide full software chat-based customer service to clients on a SaaS-type basis. Also you should start seeing a theme with these investments. They create a win-win-win between enterprises, their customers, and the customer service employees.

Why We Liked LiveChat: Three Key Advantages

There were three key advantages for companies using LiveChat’s services. These advantages in turn made it a great business investment:

1. Improved Response Time & Customer Captivity

Traditional customer service communication revolves around the phone and email. While both of these mechanisms work well, they don’t work fast enough. Customers wait days for an email response. And nobody likes waiting on hold even though “your call is very important to us.”

LiveChat strips away the fat and gets to the heart of the problem — response time. If you’re using LiveChat’s software, you can answer your customer’s questions in real time. You can even see what they’re typing before they send it. While it’s easy to track the quantitative improvement in response time, another benefit happens underneath the surface. Increased customer retention.

Solving customer problems quickly is one of the best ways to not only keep a customer, but create a customer for life. Who has the advantage in keeping a customer? The business that takes 24-48 hours to respond to a question? Or the business that responds within 24-48 seconds?

2. Increased ROI with Customer Service Staff

With LiveChat, one agent can service as many support questions as they can tolerate. There’s no longer a 1:1 correlation between service staff and customers supported. Looking from the business side of things, this feels like a no-brainer.

If you’re looking to cut costs, simply reduce the amount of service agents while retaining the best ones. Knowing that your best service agents can handle the additional work. In other words, spend half as much while getting the same amount of productivity. That’s an easy pitch.

3. Increased Sales Conversions

LiveChat lets you know how many people are browsing your website in real time, what page they’re on and how long they’ve been there. This is valuable information. LiveChat’s pitch is that every person that browses your website is a potential customer.

Why not reach out and see what they need? Many companies reported an increase in sales of up to 30% after installing LiveChat’s software. You wouldn’t get a chance to make these incremental sales if you don’t have LiveChat (or something similar).

In fact, depending on the growth, increased sales might end up paying the majority of your LiveChat bill.

Solving problems for both the customer and enterprise creates a very valuable and profitable business. Check out some of LVC’s operating stats:

    • 83% Gross Profit Margins
    • 68% EBITDA Margins
    • 64% EBIT Margins
    • 50% Net Profit Margin
    • 105% ROE
    • 93% ROA

That’s not bad! And remember, at the time we wrote this the company sold for 15x current earnings.

So how did we think about valuation? We used our three alternate reality valuation framework.

How We Thought About LVC Valuation (Adjusted For USD)

Here’s a snippet from our report on LVC’s valuation (emphasis mine):

    • Pessimist View

The Pessimist view assumes -5% top-line revenue growth, margin compression and no multiple expansion. How would LVC get here? Failure to increase ARPU. Inability to land Enterprise Level contracts and higher expenses due to hiring.

In this scenario, we’d end up with 2024 revenues of $21M, $10M in FCF and $140M in Enterprise Value. Subtracting out net debt gets us $148M in Market Cap.

Divide that by the number of shares and we get $6/share in intrinsic value. Around 40% downside from where prices are now. I don’t think this scenario is likely. The odds of LiveChat losing 5% in revenue a year for the next five years is low.

    • Stagnant View

In our stagnant view, we assume zero top-line growth after FY2019. We’ll also assume historical gross and EBITDA margins, but no multiple re-rating. In this scenario, we end 2024 with $27.40M in revenues, $15M in FCF and $193M in Enterprise Value.

Subtracting out net debt gets us Market Cap of $201M, or $8/share (16% downside). This is close to where it’s currently trading. In other words, the market doesn’t look like it’s pricing in any future growth for LVC.

I don’t think this scenario is likely going forward. It’s hard for a company that’s generated historical 15% annual top-line growth to stop growing. Especially in an industry with major tailwinds.

    • Optimistic View

In our optimistic view, we assume 15% top-line revenue growth with a small improvement in EBITDA margins (reflecting company’s adjustments to hiring more people). We’re also assuming a slight multiple re-rating from 12x to 15x EBITDA based on increased ARPU, more users, high free cash flow generation and net cash position.

In this scenario, the company will generate $54.7M in 2024 revenue, $38M in EBITDA and $30M in FCF. We end 2024 with Enterprise Value well over $400M (doubling from current EV).

Subtracting out net debt and dividing by shares outstanding get us over $17/share in intrinsic value. That’s good enough for an 80%+ upside.

So why did we include LVC in our 2020 Best Winners? Here’s why.

The Macro Ops Trifecta: Riding Big Winners

The stock traded ~37PLN when we sent our report to Collective members. Since then the stock’s gained over 146%. Check out the chart below.

There’s one powerful aspect of LVC’s chart: the long-term trend.

Save for the one-time COVID blip in March, LVC stayed above both the 200MA and 50MA for the duration of the trend since we published.

This is the power of finding great companies and riding bull trends. It’s how you can turn small amounts into fortunes. Betting big when the stars align.

The MOCS Rating & Preview of Newest High-Conviction Bet

Throughout this article we’ve taken you on a journey from idea generation to business evaluation to trend confirmation. These four ideas prove that the Macro Ops Framework works. And works well. We have other names in our book that are up 40%, 50% even 60%+ in the last few months.

Can we guarantee performance like this once you join the Collective? No, of course not.

But what we can guarantee is a systematized process — a method of finding and profiting from — these great businesses.

We do this through a quantitative process called the Macro Ops Composite Score (or MOCS, for short). The MOCS takes everything we discussed in each of our case studies and distills it down to one score. One ranking out of 100.

That way we can clearly see which companies are better than others and which deserve more of our attention and capital.

As an investor, those four case studies are enough evidence for me to dive into the Collective. But if that didn’t do it for you, we’ve got one more teaser.

Our Newest High Conviction Bet: A Hyper-Growth, Differentiated Product, and Aligned Management

Our newest High Conviction Bet is a micro-cap company specializing in a one-of-a-kind product. The company has exclusive rights to produce this differentiated product, ensuring tremendous IP advantages.

People love this product. Nearly every review is 4-5 stars and comes with praises like, “I know it’s expensive but I can’t stop buying it. I’m hooked!”

This enthusiasm shows in the company’s rapid revenue growth over the last four years. The company did $1.16M in sales in 2017. At the end of their fiscal 2020, that same company generated $14M in revenue. So far they’re on pace to smash last year’s revenues with 2021 LTM of $28M.

Management is very bullish on the company. The founder/CEO owns 16% of the stock and said publicly he thinks the business is worth $200M in the next 18-20 months. If he’s right it would double the current market cap.

Better still, we believe the company’s just getting started. We see a path where this $100M market cap company can generate $100M+ in revenue. We believe this company will get bought out by one of the bigger players in the space. If that happens, we estimate the company could sell for 5-10x sales.

In other words, we believe there’s a clear path to a 5-10x return on this stock at the current market price.

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Brandon Beylo

Value Investor

Brandon has been a professional investor focusing on value for over 13 years, spending his time in small to micro-cap companies, spin-offs, SPACs, and deep value liquidation situations. Over time, he’s developed a deeper understanding for what deep-value investing actually means, and refined his philosophy to include any business trading at a wild discount to what he thinks its worth in 3-5 years.

Brandon has a tenacious passion for investing, broad-based learning, and business. He previously worked for several leading investment firms before joining the team at Macro Ops. He lives by the famous Munger mantra of trying to get a little smarter each day.


Investing & Personal Finance

AK is the founder of Macro Ops and the host of Fallible.

He started out in corporate economics for a Fortune 50 company before moving to a long/short equity investment firm.

With Macro Ops focused primarily on institutional clients, AK moved to servicing new investors just starting their journey. He takes the professional research and education produced at Macro Ops and breaks it down for beginners. The goal is to help clients find the best solution for their investing needs through effective education.

Tyler Kling

Volatility & Options Trader

Former trade desk manager at $100+ million family office where he oversaw multiple traders and helped develop cutting edge quantitative strategies in the derivatives market.

He worked as a consultant to the family office’s in-house fund of funds in the areas of portfolio manager evaluation and capital allocation.

Certified in Quantitative Finance from the Fitch Learning Center in London, England where he studied under famous quants such as Paul Wilmott.

Alex Barrow

Macro Trader

Founder and head macro trader at Macro Ops. Alex joined the US Marine Corps on his 18th birthday just one month after the 9/11 terrorist attacks. He subsequently spent a decade in the military. Serving in various capacities from scout sniper to interrogator and counterintelligence specialist. Following his military service, he worked as a contract intelligence professional for a number of US agencies (from the DIA to FBI) with a focus on counterintelligence and terrorist financing. He also spent time consulting for a tech company that specialized in building analytic software for finance and intelligence analysis.

After leaving the field of intelligence he went to work at a global macro hedge fund. He’s been professionally involved in markets since 2005, has consulted with a number of the leading names in the hedge fund space, and now manages his own family office while running Macro Ops. He’s published over 300 white papers on complex financial and macroeconomic topics, writes regularly about investment/market trends, and frequently speaks at conferences on trading and investing.

Macro Ops is a market research firm geared toward professional and experienced retail traders and investors. Macro Ops’ research has been featured in Forbes, Marketwatch, Business Insider, and Real Vision as well as a number of other leading publications.

You can find out more about Alex on his LinkedIn account here and also find him on Twitter where he frequently shares his market research.